Chapter 6 - Just the Facts

Agent supervision:

A broker is responsible for the actions of licensees working under their license. In order to demonstrate proper supervision, brokers need to implement a combination of training and oversight. The risks taken by a broker and their agents expose the broker to liability caused by an: • error; • omission; or • misunderstanding brought about by the activities of the broker or their agents. All acts carried out by a broker or their agents present the possibility that a client or other party will be injured financially. It is the risk of causing these losses which the broker needs to control. Thus, brokers need to maintain a risk reduction program to keep claims from clients and others under control. As a buffer against liability, a broker can purchase negligence insurance, called errors and omissions insurance, or more simply, E and O insurance. With the payment of a premium, E and O insurance protects brokers from the full cost of defending against a negligence claim made by a client or others.

Specialty areas - Sale of busins:

A business opportunity is the sale or lease of the operations and goodwill of an existing business enterprise or opportunity. The arranging of a sale or purchase of a business opportunity is governed by the CalBRE. To receive a fee for the sale of a business opportunity, it is necessary to hold a real estate license, unless the person receiving the fee is licensed as a securities broker or dealer by California or the United States. The sale of a business opportunity may consist of two transactions: • the sale of the business, including inventory, trade fixtures and goodwill (classified as personal property); and • the sale of the real property itself, whether a fee or leasehold interest, including the building and land. The documents used in the sale of a business include a: • bill of sale; • Uniform Commercial Code Financing Statement (UCC-1) for the personal property; and • a deed for the transfer of the real property. The transfer of more than one-half the business's inventory of materials or goods to a person other than a customer of the business is called a bulk sale. In the sale of a retail business, other considerations exist, such as the buyer's request for a certificate of clearance from the State Board of Equalization (SBOE) to assure the sales tax has been paid up to the close of escrow. Other considerations include approvals by government agencies and building departments, as well as acquisition of city business permits and permits by the Alcohol Beverage Control (ABC) in regards to alcohol licenses. Franchises are business opportunities, as in the right to conduct business using the franchisor's business plan. An escrow is required if the business opportunity includes a liquor license.

Truth in advertising:

A licensee's name and license number needs to be contained in all of their advertising intended to be the first point of contact with a potential client, including business cards. Advertisements may not be misleading. Examples of misleading advertisements include: • the failure to state material facts about the condition of the property; or • publishing a map that causes people to believe a property is closer to area amenities such as shopping and transportation than it actually is. Puffing refers to the exaggeration of a property feature that becomes misleading when a reasonable person perceives it as an absolute fact. A blind advertisement is an ad that neither names the broker nor states a licensed agent is involved. Buyer gifts, such as movie tickets or wine, are permissible so long as they are: • available to everyone; and • any obligation, such as attending a presentation, is clearly disclosed.

Need for inspection and obtaining/verifying information:

A seller's agent owes a duty to the prospective buyer to conduct a reasonably diligent visual inspection of the property for defects which adversely affect the value of the listed property. The seller's agent notes on the TDS any defects observable or known to the seller's agent that are not already noted by the seller or are inconsistent with the seller's disclosures. The TDS is handed to prospective buyers as soon as practicable, putting the buyer and the buyer's agent on notice of physical defects in the property which are observable or known to the seller or the seller's broker and their agents. All property information received from a seller is reviewed by the seller's agent for inaccuracies or untruthful statements. However, a seller's agent need not investigate the seller's claims any further before using the information to market the property so long as they are not known to the agent to be false. An agent can hire a home inspector to generate a home inspection report (HIR) used to prepare the seller's TDS, releasing the seller's agent of liability. However, if the seller or seller's agent is aware of a material fact that is not reported by the inspector, neither is relieved of liability. Further, use of an HIR by the seller's agent in the preparation of the TDS does not relieve the agent from conducting their mandatory visual inspection.

Disclosure of material facts affecting property value:

Disclosure of material facts affecting property value is primarily accomplished through the delivery of the Transfer Disclosure Statement (TDS) and Natural Hazard Disclosure Statements (NHD). The buyer is also to receive copies of the following booklets: • Environmental Hazards: A Guide for Homeowners, Buyers, Landlords and Tenants (on all one-to-four residential units); • Protect Your Family from Lead in Your Home (on all pre-1978 one-to-four residential units); and • The Homeowner's Guide to Earthquake Safety (on all pre-1960 one-to-four residential units). Further, if a property was built prior to 1978, the buyer must also receive a copy of the Federal Lead-based Paint (LBP) disclosure. Lead-based paint is any surface coating containing at least 1.0 milligram per square centimeter of lead, or 0.5% lead by weight. Generally, seller's agents are not required to voluntarily disclose information to a potential buyer regarding a prior occupant whose death, from any cause, occurred on the real estate more than three years prior to the purchase offer, or who was afflicted with HIV or AIDS. However, if a death on the property for some reason adversely affects the market price of the property, it must be disclosed. However, on direct inquiry by the buyer or the buyer's agent about deaths on the property, the seller's agent must disclose their knowledge of any deaths on the real estate, no matter when they occurred. An intentional concealment of a death after a buyer makes a direct inquiry is a breach of the seller's agent's general duty and the buyer's agent's agency duty.

General ethics:

Ethics are a set of values which guide a licensee's behavior towards others. Ethical and legal guidelines are covered in the Business and Professions Code. For the purpose of taking the state exam, presume that any question that asks whether it is illegal or unethical should be presumed to be illegal. Recognize that unusual contracts between clients and licensees, such as net listings and listings with options to purchase, require a greater amount of transparency - full disclosure on the part of the licensee. Pocket listings - holding a signed listing contract rather than submitting it for exposure to the general public on the Multiple Listing Service (MLS) - are unethical unless explicitly authorized by the seller. Fiduciary duty requires a maximum effort to advertise a property on behalf of the seller. To hold the listing without releasing it on the MLS creates a conflict of interest since the salesperson's purpose for doing so is to receive both sides of the commission. A conflict of interest arises when a broker or their agent, acting on behalf of a client, has a competing professional or personal bias which hinders their ability to fulfill the fiduciary duties they have undertaken on behalf of their client. In a professional relationship, a broker's financial objective of compensation for services rendered is not a conflict of interest. However, fees and benefits derived from conflicting sources must be disclosed to the client. This includes compensation in the form of: • professional courtesies; • familial favors; and • preferential treatment by others toward the broker or their agents.

Trust account management:

Funds belonging to others which a broker and their agents handle when acting as agents in a transaction are called trust funds. Trust funds generally include: • rents and security deposits collected under a property management agreement; • good faith deposits tendered by a buyer with an offer to purchase; • fees and costs handed to the broker in advance of their performance of agreed-to services; and • loan payments and funds on contract collection and loan brokerage. • Trust funds may also be in the form of any monetary or other personal property of value. Trusts funds are held by brokers for safekeeping and are kept separate from the broker's personal funds. Recordkeeping and accounting requirements are imposed on brokers when they receive, transfer or disburse trust funds. Monies collected on behalf of a client need to be deposited no later than three business days after receipt. A broker may maintain a maximum of $200 in the account to offset bank fees. The commingling of client funds with other client monies is one of the primary causes of licensee disciplinary action. Similarly, conversion occurs when a licensee uses the client's funds for their own purposes. Any employee may be authorized by the broker to withdraw monies from the trust fund. If the authorized person is not licensed, they need to have a fidelity bond for an amount equal to what they can access. A trust account ledger must be maintained even when client funds are not cashed but transferred to escrow or title companies. Ledgers and trust accounts are to be balanced monthly. If a broker owns an apartment building, the monies from this property are to be handled separately from that of the clients and not deposited in a client trust account.

Other information related to discrimination and fair housing:

Many questions on the state exam will be asked about discrimination and what is ethically and legally correct. Consider the protected groups covered by these laws, and recognize that the public policy goal is to have a color-blind society that treats all people the same. These are some of the key points and terms concerning discrimination: • redlining - a lender or insurance company refusing to do business within a geographic area; • steering - a licensee attempting to show prospective buyers and tenants only properties they deem appropriate, rather than what the client wants to see; • blockbusting and panic selling - an attempt to influence sales or rentals of real estate by exploiting the prejudices of property owners in a neighborhood. For example, a licensee attempting to secure a listing to sell a residential property by telling the seller the neighborhood demographics are changing, and they need to sell now before the change occurs; • implicit discriminatory practices - those which are not openly discriminatory, but result in discriminatory effects; • complaints must be filed with the Department of Housing and Urban Development (HUD) within one year of the discriminatory act; • victims of housing discrimination can enforce their rights by filing civil court cases in federal court, state or local courts or by filing a complaint with HUD.

Specialty areas - Mobile homes:

Mobilehomes have a unique legal status, being either real estate or personal property. A mobilehome, also known as a manufactured home, is a structure: • at least eight feet in width, 40 feet in length or more than 320 square feet when transported in one or more sections; • built on a permanent chassis; • designed to be used as a dwelling with or without a permanent foundation. A mobilehome that meets the requirements and is attached to a permanent foundation loses its personal property status and becomes real property since it is now a permanent fixture or an improvement to the real estate. The broker handling the sale of a mobilehome that is considered real estate conducts themselves as they would on the sale of any type of real estate. The rules for buying, selling, registering and encumbering mobilehomes that are not considered real property differ from the rules for real estate sales. The government agency responsible for the registration of mobilehomes is the California Department of Housing and Community Development (HCD). Mobilehomes are registered with the HCD, unless the mobilehome is considered real estate. When a new mobilehome is first purchased, it is registered on a form provided by the HCD referred to as the original registration of the mobilehome. At the time of the original registration of the mobilehome, the HCD creates a permanent title record for the mobilehome. The real estate licensee can only handle sales of a mobilehome subsequent to the original registration.

Technology and records documentation:

Modern technology has allowed for more efficient record keeping, documentation and marketing to be done by computer and through the internet. Licensees need to remember the time requirements for the storage of records (three years) and the need to be able to recover that data if required by courts or by a CalBRE audit. Brokers also need to recognize their responsibility for approving and supervising any internet marketing.

Natural Hazard Disclosure Statements (NHD):

Natural hazards come with the location of a parcel of real estate, not with the man-made aspects of the property. The existence of a hazard due to the geographic location of a property affects its desirability, and thus its value to prospective buyers. Hazards, by their nature, limit a buyer's ability to develop the property, obtain insurance or receive disaster relief. Whether a seller lists the property with a broker or markets the property themselves, the seller must disclose to prospective buyers any natural hazards known to the seller, including those contained in public records. To unify and streamline the disclosure by a seller (and in turn the seller's agent) for a uniform presentation to buyers concerning natural hazards which affect a property, the California legislature created a statutory form entitled the Natural Hazard Disclosure Statement (NHD). Locations where a property might be subject to natural hazards include: • special flood hazard areas, a federal designation; • potential flooding and inundation areas; • very high fire hazard severity zones; • wildland fire areas; • earthquake fault zones; and • seismic hazard zones. Actual use of the NHD by sellers and their agents is mandated on the sale of all types of properties, with some sellers (but not agents) being excluded. The NHD handed to a prospective buyer is unrelated to the environmental hazards and physical deficiencies in the soil or property improvements. These hazards are disclosed by use of the TDS.

Permitted activities of unlicensed sales assistant secretary:

Real estate licensees often hire unlicensed assistants to perform nondiscretionary administrative activities. An unlicensed assistant may not perform any activity for which a real estate license is required. Thus, an unlicensed assistant cannot communicate price and terms with potential clients. An unlicensed assistant may write up documents including contracts and comparative market analyses (CMAs), so long as they are reviewed by the broker. They may also host an open house provided they do not answer questions regarding the price and terms. As with an office receptionist, they may take telephones calls but need to refer the call to a licensed agent once it is determined the call is in response to a sign or advertisement. Further, they may not induce anyone to use their employing broker's services, or make any solicitation regarding a specific property, transaction or product. Any unlicensed person may locate prospective buyers, sellers, borrowers, tenants or landlords for referral to a broker's services as an "unlicensed finder" for a fee. Finders need to be hired under written contracts of employment. These employment contracts will delineate the finder's responsibilities and limit their conduct to activities permitted by regulations for their unlicensed statuses. Finders may be compensated by: • a salary; • a percentage fee; or • a lump sum basis per closing.

Record keeping requirements:

The Business and Professions Code requires records to be kept for three years. Records include: • copies of all listings; • trust account ledgers; • deposit receipts; and • all documents used in connection with a transaction. Electronic records are permitted so long as they are non-erasable, "write once, read many" (WORM) format. The hard copies must be made available to the California Bureau of Real Estate (CalBRE) upon request.

CalBRE jurisdiction and disciplinary actions:

The California Legislature created the California Bureau of Real Estate (CalBRE) to oversee, regulate, administer and enforce the real estate law. The CalBRE is contained within the Department of Consumer Affairs. Most of the laws that relate to real estate practice are contained in the Business and Professions Code. The chief officer of the CalBRE is the Real Estate Commissioner. The Real Estate Commissioner's principal responsibility is to enforce all the real estate laws pertaining to real estate licensing and the Subdivided Lands Law. The Commissioner ensures that real estate licensees and members of the public dealing with licensees receive maximum protection. As a means of enforcing licensing and subdivision laws, the Commissioner promulgates rules and regulations addressing conduct of persons falling within the real estate law activities. The regulations are part of the California Code of Regulations known as Title 10. The CalBRE may fine, suspend or revoke a license. Legal actions such as fraud are dealt with by the Justice Department. The Commissioner also has authority over developers through the Subdivided Lands Law. The CalBRE does not hear commission disputes, which are settled by civil lawsuits.

California Real Estate Recovery Fund:

The Real Estate Recovery Fund, also known as the Consumer Recovery Account, is available to individuals who have obtained a final-court judgment against a real estate licensee for losses caused while acting as an agent and are unable to recover the judgment from the licensee. The judgment needs to be based on: • fraud, misrepresentation or deceit; • conversion of trust funds; or • criminal restitution. Recovery from the fund is limited to $50,000 for one transaction and $250,000 for any one licensee. A licensee's license will be suspended and will not be reinstated until the licensee repays any amounts paid from the Real Estate Recovery Fund to satisfy a judgment against them, plus interest.

Fair housing laws - 1968 Civil Rights Act

The Thirteenth Amendment of the United States Constitution is the foundation of much of the fair housing laws. Most Fair Housing Laws come from the 1968 Civil Rights Act consisting of the following two (2) components: 1) Federal Fair Housing Act (FFHA); Discrimination against an individual is prohibited by the FFHA in: • the sale, rental or advertisement of a residence; • offering and performing broker services; • making loans to buy, build, repair or improve a residence; • the purchase of real estate loans; or • appraising real estate. Discriminatory actions of a broker or sales agent covered under the FFHA are actions taken against individuals based on that individual's: • race or color; • national origin; • religion; • sex or sexual orientation; • familial status; or • handicap. 2) Federal Open Housing Law. NOTE: A residence held out for sale, lease or refinance is defined to include: • any building or structure occupied or designed to be occupied as a residence by one or more families; and • any vacant land offered for sale or lease for the construction of a residential building or structure.

Property management:

The management of client properties requires a broker license. A broker has the authority to act as a property manager by virtue of their CalBRE license alone. There is no special "property management" license or endorsement required under California law. For exam questions concerning the relationship between the property manager and the tenant, many of the Fair Housing principles (discussed elsewhere) apply. A property manager's authority to take possession and control of income-producing real estate and manage its leases, rents, expenses, mortgage payments and accounting in expectation of a fee is established in a property management agreement. The property management agreement sets out the specific rights, responsibilities and expectations of the property manager and the landlord, and includes authorized activities, performance standards and expense limitations. Compensation for the manager can be a flat rate or a percentage of monies collected. Compensation can never be a kickback or discount on materials or services paid by the owner. A security deposit is security for the tenant's default on obligations agreed to in the rental or lease agreement. The maximum security deposit equals two months' rent for an unfurnished rental and three months' rent for a furnished rental unit. No other consideration affects the maximum amount that can be demanded. After a tenant has surrendered the unit, the property manager has 21 days to return any unused deposit along with an explanation of how the monies were used.

Transfer Disclosure Statement (TDS):

The seller of a one-to-four unit residential property completes and delivers to a prospective buyer a statutory form called a Transfer Disclosure Statement (TDS), more generically called a Condition of Property Disclosure Statement. The state mandated disclosure form requires the seller to state all known material facts affecting the property's value and desirability. The seller's mandated use of the TDS requires it be prepared with honesty and in good faith, whether or not a seller's agent is retained to review its content. Further, the listing agent is expected to make a thorough inspection of the property and report honestly what is observable. The licensee may not fill-out the seller's portion of the form. The TDS is required even when the property is being sold "as is" or when the property is sold by the owner without an agent, known as a For Sale By Owner (FSBO). Transactions which exempt the seller (but not the seller's agent) from preparing and delivering the statutory TDS to the buyer include transfers: • by court order, such as probate, eminent domain or bankruptcy; • by judicial foreclosure or trustee's sale; • on the resale of real estate owned property acquired by a lender on a deed-in-lieu of foreclosure, or by foreclosure; • from co-owner to co-owner; • from parent to child; • from spouse to spouse, including property settlements resulting from a dissolution of marriage; • by tax sale; • by reversion of unclaimed property to the state; and • from or to any government agency. A buyer has two years to bring an action against a licensee for failure to disclose a known material fact. If the TDS is belatedly delivered to the buyer, the buyer has three days after personal delivery or five days after mailed delivery to terminate the offer in writing.

CalBRE publications and reports:

There is a wealth of information for both consumers and licensees available through the CalBRE website, www.calbre.ca.gov. In the upper right-hand corner above the search bar, the Publications tab provides access to a full library of publications and reports produced by the agency. These publications are categorized by: • consumer publications; • licensee/examinee publications; and • subdivision publications. Examinees are advised to review the CalBRE's Reference Book - A Real Estate Guide, which provides a helpful discussion of real estate principals and basic matters of practice. This state publication is an excellent resource for the purpose of preparing for the licensing exam.

Licensing - continuing education requirements and procedures:

To engage in the business of real estate as a real estate broker or agent, a person first obtains a real estate license issued by the CalBRE. A real estate broker is a person who, for compensation or in expectation of compensation, engages in: • negotiating the sale, purchase or exchange of real estate, leases or business opportunities; • soliciting listings from buyers or sellers; • leasing or renting, or offering to lease or rent, property on behalf of an owner or tenant; • collecting rent from real estate or business opportunities; • assisting in the purchase or lease of property owned by the state or federal government; • negotiating real property sales contracts or loans to be secured by real estate or business opportunities on behalf of lenders or borrowers; • negotiating the sale or purchase of mobilehomes. To be eligible for a broker or sales license, the applicant needs to: • be at least 18 years old; • be honest and truthful; • provide proof of legal presence in the U.S.; • make the application on the proper form prescribed by the CalBRE; • complete the mandatory education; and • pass the qualifying exam. A real estate broker and real estate sales license is valid for four years from the date of issuance noted on the license certificate. All real estate brokers and sales agents need to complete at least 45 hours of continuing education (CE) to renew a license issued by the CalBRE. The CE requirements for license renewal were legislated to help maintain and improve the level of competence of real estate brokers and agents. The 45-hours of CalBRE-approved CE Real estate agents and brokers need to complete consists of: • five mandatory three-hour courses (15-hours) in the following subjects: ° agency; ° fair housing; ° trust funds; ° ethics; and ° risk management, known collectively as AFTER; • a minimum of 18-hours of consumer protection courses; and • the remaining clock hours needed to complete the 45-hours under the categories of either consumer protection or consumer service. If the licensee fails to renew prior to their expiration date, they enter a two-year grace period. They may not practice real estate when their license is expired.

Other fair housing laws:

Under the Americans with Disabilities Act (ADA), an employer may not discriminate against a qualified person with a disability who seeks employment based on that person's disability. ADA requires various amenities added to new construction, but generally does not require changes to existing buildings. California housing laws: -- The Fair Employment and Housing Act (Rumsford Act) prohibits discrimination in supplying housing accommodations and is overseen by the Department of Fair Employment and Housing -- The Housing Financial Discrimination Act (Holden Act) protects against discrimination in lending practices. -- The Unruh Civil Rights Act prohibits discrimination in businesses.